Value drivers of development stage biopharma companies

Abstract

Objective Scholars previously estimated research and development (R&D) costs of the internal drug development process. However, little is known about the costs and value arising from externally acquired therapeutics. This study identifies and estimates the magnitude of factors associated with Biopharma acquisition value. Methods SDC Thomson Reuter and S&P Capital IQ were screened for majority acquisitions of US and EU Biopharma companies developing new molecular entities for prescription use (SIC code: 2834) from 2005 to 2020. Financial acquisition data were complemented with variables characterizing the target’s product portfolio extracted from clinicaltrials.gov, Drugs@FDA database, US SEC filings, and transaction announcements. A multivariate regression assesses the association of firm value with extracted variables. Results 311 acquisitions of companies developing prescription drugs were identified over the study period. Acquirers paid 37% (p < 0.05) more for companies with biologics and gene therapeutics than small-molecule lead drugs. Multi-indication products were acquired for a 12% premium per additional indication (p < 0.01). No significant valuation difference between companies developing orphan and non-orphan designated lead products was observed (18%, p = 0.223). Acquisition value positively correlated with the total number of further products, headquarter location in the US, underlying market conditions, and acquirer market capitalization (p < 0.05). Conclusions Internal and external drug development consumes many financial and human resources, yet it is important for entrepreneurs, regulators, and payers to understand their precise magnitude and value drivers. This information permits the design of targeted pricing and industrial policies that incentivize the development of novel drugs in areas with high unmet needs.

Value and Price of Multi-indication Cancer Drugs in the USA, Germany, France, England, Canada, Australia, and Scotland

“…Furthermore, scientists leverage new technologies, including next-generation sequencing, high throughput screening, or machine learning, to quickly test hypotheses and identify optimal patient populations (and indications) for a drug [ 31 , 32 ]. Discovering platform technologies, such as targeted therapies or immuno-therapies, which can be used across multiple diseases, are especially desired and valued by investors [ 1 , 4 , 5 ].…”

“…Additionally, multi-indication drugs offer dynamic efficiency gains for patients and manufacturers as lengthy and costly research and pre-clinical testing efforts only occur once per drug. Expanding drugs to new indications increases revenues, profits, returns, and valuations for manufacturers [ 4 , 5 ]. However, pricing and reimbursement mechanisms have not evolved at the same pace as pharmaceutical development, intensifying concerns about the affordability of new drugs.…”

Initial and supplementary indication approval of new targeted cancer drugs by the FDA, EMA, Health Canada, and TGA

“…Whilst this observation could suggest that a large part of indication development is random, additional variables may be necessary to fully explain companies’ decision making in pharmaceutical development. For instance, variables characterizing an indication’s peak sales and competitive environment, the pharmaceutical company’s portfolio size, R&D partnerships of certain indications, licensing agreements, mergers and acquisitions, and underlying market conditions may influence economic decision of pharmaceutical companies throughout the drug development process [ 10 , 11 , 48 ].…”

“…Similarly, pharmaceutical companies are incentivized to pursue research and development (R&D) in diseases with a high unmet therapeutic need with expedited clinical development and regulatory approval timelines [ 9 ]. Michaeli et al previously demonstrated this strategy yields high company valuations and excess financial returns for Bioentrepreneurs and Investors [ 10 , 11 ]. Arguably more substantial than R&D incentives could be the monetary incentive created by uniform pricing of multi-indication drugs.…”

Valuation and Returns of Drug Development Companies: Lessons for Bioentrepreneurs and Investors

“…Consequently, in this study, we aim to identify key value drivers of Biopharma ventures based on a cross-sectional sample of 311 Biopharma acquisitions. While it is established that Biopharma firm value is mainly dependent on the lead drug's development stage [5][6][7][8][9], we also evaluate the association of firm valuation with the lead drug's FDA orphan designation status, number of indications, molecule type, and disease area.…”